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MOSL: TELECOM-Turning into a three-player market-Economics of VoLTE handsets remain questionable

​TELECOM: Turning into a three-player market; Economics of VoLTE handsets remain questionable

We met various telecom industry participants in Delhi, including regulatory officials, equipment vendors and operators.

Telecom is consolidating into a three-player market, with more than one-fourth of the industry share remaining low-hanging fruit for stronger players like Bharti and RJio. The economics of VoLTE feature phones remain questionable (ARPU of INR100) due to the high interconnection usage charges (IUC), which may shave off majority of revenues for the players. Bharti’s capex intensity may have peaked in FY18E, while Vodafone and Idea have delayed their capex to FY19E (post-merger). RJio may not extend its 84-day ‘Dhan Dhana Dhan’ offer. The government may not do much to clear the financial stress in the system. Also, reduction of IUC charges appears unlikely. The technology for backhaul connectivity on microwave is advancing well – it could substitute fiber optic technology in many urban areas and prove to be a game-changer in meeting data capacity requirements – and will be deployed post the Department of Telecom (DoT) approval.

Following are the key takeaways from our discussion with various industry participants

• Telecom may turn into a three-player market in the next 18 months. As competitive intensity reduces, there could be 8-10% growth opportunity over the longer term.
  
• Market share growth opportunity for strong players: Nearly 26-27% market share of smaller players, as well as the merger-related revenue dilution of Vodafone and Idea, could be taken up by the strongest operators - i.e. Bharti and RJio.
  
• Economics of VoLTE feature phones do not appear viable: Even after handset subsidy, ARPU is unlikely to be above INR100. This may not leave meaningful net revenue after high IUC on outgoing calls.
  
• Bharti network capability: According to network vendors, Bharti's data network coverage (including both 3G and 4G) is better than RJio. Its access capacity is also better than RJio, but backhaul is 30% compared to RJio's ~80%.